- Debt settlement slashes principal balances.
- The FTC created new rules for debt settlement firms in late 2010.
- The new rules forbid the collection of fees until after the first settlement occurs.
My aunt has $30,000 in a debt settlement plan. She dropped out after 6 months and did not get a 100% refund. What can she do?
My 72-year-old aunt has $30,000 credit card debt between 2 cards. She went through a credit consolidation company but after 6 months of taking almost her whole social security check,and being harassed by the credit card companies that they were supposed to help her with she decided to cancel her business with this consolidation company which they told her she could do at anytime. They did nothing with her card companies and ended up giving her only half the money they took from her. What to do?
Your question is difficult to answer without knowing more details about the situation described. Accordingly, I will make several assumptions in my analysis, some of which are contradictory. This is not because I favor your aunt or the debt settlement company, my position is neutral, but because there are not enough facts to understand the full picture. Allow me to define a few terms and discuss some of the concepts involved before I address your questions
What is Debt Settlement?
Debt settlement, also called debt negotiation or debt resolution, is a process where settlements are negotiated with lenders where they agree to forgive a part of a balance, frequently saving between 40% to 60% of what was owed, though results vary. The consumer stops making monthly payments to creditors. Each debt is negotiated individually, which involves multiple phone calls, faxes, paperwork, and negotiation over months or years, depending on the creditors and the amount owed. The consumer pays the new agreed-upon sum. In some cases, the consumer will pay this settled balance over a structured period and must make monthly payments. In other cases, the consumer must make a lump-sum payment.
The forgiven balance is considered taxable income by the IRS, although if the consumer is insolvent at the time of settlement this may be mitigated (seek advice from a tax advisor on Cancellation of Debt Income, and be sure to ask about Form 982). In addition, the settlement will be noted on the consumer's credit report.
The biggest benefit to debt settlement is the reduction of principal. If an unsecured debt is so large that the consumer cannot pay it off and faces bankruptcy, debt settlement is a less harsh option. Although the consumer's credit score will be dinged while enrolled in the program, it will not be as severe as it would be with a bankruptcy.
Of course, a consumer can negotiate with creditors on their own. This is a good choice if you are a natural haggler and have the time to devote to negotiations. Alternatively, many apply for debt settlement and hire a debt settlement service to do the heavy lifting. Professionals have better luck negotiating settlements because of their experience with each creditor. They know what terms each creditor will accept, based on history. Big debt settlement providers have bulk and scale to leverage their relationships to benefit all clients. Just as importantly, experienced pros know which creditors refuse to settle debts, and will set their clients’ expectations accordingly.
Who Qualifies for Debt Settlement?
Debt settlement programs take from two to five years to complete, which most taking three years. The consumer must have income sufficient to put savings into a special account under that is in their name and under their control. Payments on accounts enrolled in the plan stop. As the balance of the special account grows, and as creditors charge-off the enrolled accounts, the debt settlement company will begin negotiations with the creditors.
The consumer must have sufficient income to make a monthly deposit into their special account. A consumer with no, or very limited income is not a candidate for debt settlement. Consumer that do not make the monthly deposit into their special account that he or she and the debt settlement provider agreed to will not succeed with a debt settlement program. Conversely, consumers who make consistent deposits to their special accounts almost always succeed with debt settlement.
The Federal Trade Commission & Debt Settlement
The debt settlement industry is required to follow a rules issued by the Federal Trade Commission that went into effect in October, 2010. These rules were created to protect the consumer. For instance, anyone now enrolling in a debt settlement program is not required to pay a service fee to the settlement firm until his or her account has been settled.
This FTC rules makes settlement an even more attractive option for the consumer. Why? If the debt settlement provider does not follow-through on their promises, never lifts a finger, and never settles a debt, the consumer has not paid any fees to the settlement company. He or she can take the money deposited into the special account and settle the debts on their own, or choose to do business elsewhere.
Industry observers believe the FTC rules will weed-out unscrupulous and inefficient debt settlement providers, and leave fewer providers that will compete on a level playing field.
Debt settlement providers owe a duty to potential customers to disclose all of the terms and conditions of its plan. Scrupulous debt settlement providers interview potential clients to make sure they have a reasonable chance of succeeding in the plan. They do this for two reasons:
- Debt settlement providers incur significant expenses in the early months of each client's program. Underwriters conduct credit checks to uncover additional debts the customer may not be aware of. Accounts are set up. Contacts are made with the creditors. Negotiations may begin. In many cases, the client will direct collection calls and letters to the settlement provider, which must respond to these calls.
- Some debts cannot be negotiated, such as child support and secured debt. Some creditors, but not many, refuse to negotiate debt. Some states do not allow consumers to choose debt settlement. Some consumers lack the income to repay their debt in a reasonable period of time. Enrolling a caller without regard to their chance of success wastes everyone's time and money.
You mentioned your aunt has $30,000 in credit card debt on two accounts. You mentioned she enrolled in a credit consolidation company, which I will assume you mean a debt settlement provider. If you meant a credit card counseling program that offered a debt management plan, then my analysis of your questions proceeds from a faulty assumption, and is not valid. She withdrew after six months, and was refunded half of what she paid into the plan. You mentioned payments to the provider consumed almost all of her monthly Social Security benefit. Based on my back-of-the-envelope math, her monthly payments would be about $450.
It appears the debt settlement provider was not operating under the FTC rules that came into effect in October 2010, which fits with the six-month time you mentioned. If your aunt enrolled with a debt settlement plan today and then dropped out six months later without the provider making an agreement with a creditor, she would still have 100% of the money she deposited into her special account. Ask your aunt to send a letter to the settlement provider with the facts included here. Tell her to explain that she does not think it fair she lose half the money she saved for settling her account and see no result.
Keep in mind though, the earlier discussion where I mentioned that even though nothing appeared to be accomplished, the settlement provider was working behind the scenes to settle the debts.
One thing that troubles me in your message is your mentioning that the monthly amount your aunt sent the settlement provider was almost her entire Social Security benefit. If this was your aunt's only source of household income, and she had no other asset source to draw from such as a spouse's income or pension, then the debt settlement provider made a huge mistake in agreeing to accept your aunt as a customer. If your aunt had no other income, her paying the debt settlement provider almost all of her Social Security benefit impoverished her. In short, based on the facts you presented, your aunt was a terrible candidate for debt settlement. If my assumptions are correct, your aunt should expect a 100% refund because the debt settlement firm had no reasonable expectation your aunt would ever complete a three-year program.
However, if your aunt had other household income you did not mention, then the debt settlement provider did not err when it agreed to provide her its services. If you aunt had other income and she was a viable candidate, then expecting a 100% refund would be nice, but it is not reasonable.
One additional thought: Some otherwise excellent candidates for debt settlement quit the program after bowing to creditor pressure. Once a consumer is enrolled into a debt settlement program, creditors will contact consumers repeatedly and present a parade of horrible outcomes that can befall them. Creditors will threaten legal action, or state that they will not negotiate with debt settlement providers. Both of these statements are untrue for the vast majority of consumers, and are calculated to frighten consumers away from debt settlement, and extract the largest possible payment from consumers. If your aunt was harassed or frightened into dropping the debt settlement plan, then she may not have been making a smart choice by doing so.
If writing a letter to the debt settlement provider does not produce a refund, consult with a lawyer in your state who has experience in consumer law. Ask him or her to review the contract your aunt signed. If a polite letter to the company does not produce the desired result, oftentimes a letter from a lawyer will do the trick.
To see what options your aunt has for resolving her $30,000 debt, read the Bills.com white paper Debt Relief Options: Which is Right for You to learn more.
I hope this information helps you Find. Learn & Save.
Dealing with debt
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Housing debt totaled $11.71 trillion and non-housing debt was $4.45 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
Each state has its rate of delinquency and share of debts in collections. For example, in Missouri credit card delinquency rate was 4%, and the median credit card debt was $417.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.